All eyes across global markets were on the Fed last week as the market awaited the latest policy decision and outlook – a decision that drew particular attention given the inflation environment. To its credit, the Fed brought no major surprises. It did, however, convey a slightly more hawkish tone, which included an outlook for potentially three rate hikes next year. In a market that has become accustomed to – if not dependent upon – extraordinarily easy monetary-policy settings, it was the initial positive reaction in stocks to this tone that was perhaps the surprise in the week.
United States
Stocks ended lower for the week, as the prospect of central bank tightening and fears over the impact of the omicron variant of the coronavirus sparked considerable volatility. As longer-term interest rate expectations increased, growth stocks and the technology-heavy Nasdaq Composite Index fared the worst. The latter touched an intraday low on Friday roughly 7% below its recent peak—still above the 10% threshold for a correction. Technology and consumer discretionary shares performed worst within the S&P 500 Index, while the typically defensive utilities, health care, and consumer staples sectors managed gains. Volatility to end the week was partly due to “triple witching,” or the expiration of three types of options and futures contracts on Friday. The Cboe Volatility Index (VIX) rose for the week but remained well below its levels early in the month.
The Federal Reserve’s monetary policy meeting on Tuesday and Wednesday appeared to dominate sentiment across global markets much of the week. The major indexes dropped sharply on Tuesday morning after a report that producer prices jumped 9.6% in November from a year earlier, the biggest increase since data were first collected in 2010. The data heightened speculation that Fed officials would signal more rate hikes in 2022.
Global investors may have also been reassured by Fed Chair Jerome Powell’s press conference, in which he expressed confidence in the state of the economy. Retail sales data released earlier Wednesday showed that consumers reduced spending on an inflation-adjusted basis in November, but Powell stated that “consumer demand is very strong” and suggested that the pullback might have been due to an extended holiday shopping season. Gauges of current economic activity released on Thursday came in modestly below expectations but still indicated robust expansion, while housing market indicators surprised to the upside.
| Index | Friday’s Close | Week’s Change | % Change YTD |
| DJIA | 35,365.44 | -605.55 | 15.55% |
| S&P 500 | 4,620.64 | -91.38 | 23.02% |
| Nasdaq Composite | 15,169.68 | -460.92 | 17.70% |
| S&P MidCap 400 | 2,728.09 | -51.76 | 18.27% |
| Russell 2000 | 2,173.93 | -37.88 | 10.08% |
Europe
Shares in Europe fell in line with global markets governments tightened restrictions to curb the spread of the coronavirus and central banks became more hawkish. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.35% lower. The main indexes also declined, with Germany’s Xetra DAX Index losing 0.59%, Italy’s FTSE MIB Index giving up 0.41%, and France’s CAC 40 Index dropping 0.93%. The UK’s FTSE 100 Index pulled back 0.30%.
Core eurozone bond yields whipsawed in line with major global markets this week, ending lower. They initially declined sharply, as the spread of omicron sparked fears about the economic recovery. Yields then rebounded on hawkish moves by major central banks and the European Central Bank’s (ECB) decision to scale back its emergency bond-buying program. Bond yields then came under pressure after ECB President Christine Lagarde indicated that an interest rate increase was “very unlikely” next year and on coronavirus concerns. Peripheral euro zone bond yields rose overall. UK gilt yields advanced after the Bank of England (BoE) surprised global markets with a short-term interest rate increase.
The BoE unexpectedly raised its bank rate 15 basis points to 0.25% as a first step to controlling inflation. Data released before the meeting indicated that 12-month consumer price inflation hit 5.1% in November—the highest level in a decade. The labour market also continued to tighten after the government ended its job support plan. Earlier, the International Monetary Fund suggested in its UK country review that policymakers should avoid “inaction bias” and raise interest rates to prevent inflation from becoming entrenched.
The Norwegian central bank also surprised global markets lifted its main interest rate by another 25 basis points to 0.5% and indicated that more rate increases could follow while acknowledging the potential for delays if the pandemic slows economic growth. The Swiss central bank kept an ultra-loose monetary policy in place and its key rate at -0.75%, saying inflation was lower in the country than elsewhere in Europe.
Asia
- China
Chinese markets fell in line with other global markets the week amid the resurgence in global COVID-19 cases and U.S.-China tensions after Washington placed investment and export restrictions on dozens of Chinese companies for their role in allegedly repressing China’s Muslim minorities and in supporting Beijing’s military. The CSI 300 index retreated 1.9%, and the Shanghai Composite Index eased 0.9%. Yields on China’s 10-year government bonds rose to 2.873% from the previous week’s 2.861%. The yuan to weakened to CNY 6.3714 per U.S. dollar from last week’s CNY 6.3672.
On December 9, the People’s Bank of China (PBOC) said it would raise the foreign exchange reserve requirement ratio, an action that took effect last week. The reserve ratio hike was viewed as Beijing’s attempt to rein in the yuan, which reached its highest level versus the dollar since mid-2018 earlier in December. Following the PBOC’s move, regulators granted fresh quotas worth USD 3.5 billion under the Qualified Domestic Institutional Investor scheme, a key outbound investment program.
In global markets economies, data showed that China’s factory output grew faster than expected in November, but new pandemic curbs hit retail sales and fixed asset investment growth lagged forecasts. November data also revealed that new home prices suffered their biggest month-on-month decline in six years, with the country’s lower-tier cities and developers bearing the brunt of the downturn. Government revenue from land sales fell for the fifth straight month in November, another sign of stress for the beleaguered property sector.
- Japan
Japanese equities rose over the week against global market sentiments, with the Nikkei 225 Index gaining 0.38% and the broader TOPIX Index advancing 0.46%. Investor sentiment was lifted by the U.S. Federal Reserve’s tapering decision, as many feel that the move signals confidence in the post-pandemic economy, and Japan’s open market is highly leveraged to the global economic recovery. Against this backdrop, the yield on the 10-year Japanese government bond (JGB) fell slightly, to 0.04% from 0.05% at the end of the previous week, while the yen weakened modestly, to JPY 113.56 against the U.S. dollar from the prior week’s JPY 113.39.
Following its December monetary policy meeting, the Bank of Japan (BoJ) maintained short-term interest rates at -0.1% and the target for 10-year JGBs at around 0%, as widely expected. The central bank extended its special program (launched in response to the coronavirus) to support financing, mainly of small and medium-sized firms, by six months until the end of September 2022. It will reduce some of its crisis-era monetary support by completing its additional purchases of commercial paper and corporate bonds by the end of March 2022, as scheduled.
Japan’s exports rose 20.5% in November from last year’s level, driven by a recovery in auto shipments that suggested supply chain bottlenecks may be easing. Exports to China, the U.S., and the European Union all increased strongly. Imports, meanwhile, surged 43.8%, with a weaker yen making oil imports even more expensive. Separate data showed that the recovery in Japan’s private sector was sustained in December, although it suggested that momentum was slowing. The au Jibun Bank Flash Japan Composite Purchasing Managers’ Index fell to 51.8 in December from the previous month’s 53.3. Both manufacturers and services companies signalled softer rates of output and new order growth, as cost pressures continued to build.
Other Key Global Markets.
- Mexico – Mexican stocks, as measured by the IPC Index, returned about 2.1% in range with global markets. On Thursday, Mexico’s central bank decided to raise its key interest rate by 50 basis points, from 5.00% to 5.50%. The decision was not unanimous: Four Governing Board members voted for the increase, but one policymaker preferred a smaller, 25-basis-point increase. While a rate hike was widely expected, some were surprised by the size of the rate increase.
- Chile – Chilean stocks, as measured by the S&P IPSA Index, returned -1.2% in line with other global markets. On Tuesday, the Chilean central bank held its regularly scheduled monetary policy meeting and raised its key interest rate from 2.75% to 4.00%. The decision was unanimous among policymakers and in line with market expectations.
- Turkey – Turkish stocks, as measured by the BIST-100 Index, returned about 2.4%. Late the previous week, S&P Global Ratings lowered its credit outlook for Turkey from “stable” to “negative”—a warning to investors that it could downgrade the sovereign rating at some point. S&P noted that its weaker outlook reflects the risks to Turkey stemming from currency weakness and inflation.
